Turning Principles into Profits

Have you given any serious thought to the “principles” that will guide you, and the rest of your company’s management team, in making the right decisions as your business grows? If not, here’s some food for thought.

Everyone lives their life according to a set of personal principles. These principles guide us in keeping on track and out of trouble when making life decisions. Examples include honesty, fairness in dealing with others, building a retirement fund, never running up credit card debt, etc. etc.

It’s the same with your business. Just as you lean on principles to guide your personal life ─ you also need a set of principles to guide you in making the right decisions for your business.
To be successful, every business must have one “key operating principle” that impacts all of the decisions made in every aspect of your operation.

So what is a key operating principle? Rather than try to define the word, let’s look at Wall Mart. This ultra successful company provides a real life example of the application of a clearly articulated “key operating principle” ─ and how this has a ripple effect in driving other “spin-off principles” that have led to the company’s remarkable success.

Wall Mart’s key operating principle is “we sell for less”. This is a seemingly "noble" principle that conjures up warm and fuzzy feelings in the hearts of cash strapped moms and dads who flock to their closest Wall Mart Store in ever increasing numbers in search of a bigger bang for every dollar they spend.

Through the consistent application of this “key operating principle” Wall Mart has become the world’s biggest company ─ and its 17th largest economy.

But, to operate within the framework of this “key operating principal”, Wall Mart must adhere to some very Draconian “spin-off principles” that are usually associated with 19th century sweat shops operating during the early stages of the industrial revolution.

For instance, in order to sell for less Wall Mart must keep its operating costs as low as possible. This fact drives an important spin-off principle for Wall Mart. “Pay employees the lowest possible wages and the very minimum in benefits”.

To operate within this principle Wall Mart will go to almost any length. For example, when the employees in a Quebec-based Wall Mart store went to court and won the right to organize a union, head office responded by simply closing the store. And, Wall Mart has been accused of restricting its employee's work hours per week to levels that legally exempt the company from paying benefits such as holiday pay and health care insurance.

And that’s not all. Wall Mart’s “we sell for less” principle also requires that the company treat its suppliers with the same hardnosed attitude meted out to its employees. Suppliers are regularly squeezed for lower prices and forced to meet strict shipping restrictions, extended payment terms, and the right to return goods that do not sell.

Now, I am not saying that Wall Mart is an evil empire ─ after all a corporation has no conscience ─ it operates in the best interests of its shareholders. And Wall Mart’s owners are probably more than satisfied with the profits generated by the Wall Mart Empire.

However, this is a very dramatic example that demonstrates the importance of setting a clearly articulated “key operating principle” for your company ─ and the implications this will have in determining compatible “spin off principles” for every aspect of your company’s operations.
For instance, if you are a retailer selling high-end sound equipment, and your key operating principle is to offer your customers top notch technical support and knowledgeable advice in choosing the right equipment, you cannot hire your staff at minimum wages. The principle driving your hiring practice will be to pay higher wages to be sure you get the best possible employees. If this hiring principle is not strictly adhered to, your business cannot live up to its key business principle, and it will likely fail.

OK, so where do you start to establish your company’s “key operating principle”.
Since all of your companies operating principles must be compatible, the key operating principle must provide clear direction in all business decisions that are essential for the company to achieve its business objectives. Here are a few examples of key operating principles.
(a) Selling at lower prices (b) Offering superior service coupled with higher prices (c) Offering premium products and services (d) Providing value products and minimal services

What is the image your company wants to project to customers? As you can see from the Wall Mart example, whatever decision you make will have broad implications for every part of your company’s operations.

What to do with a “key operating principle” when it’s established?
As soon as your key operating principle is set, examine what impact it will have on all other aspects of your company’s operations. Then make sure that everyone working in the company has a clear understanding of both the key operating principle the principles that naturally spin off from it. Together these principles will dictate your employee's every day decisions.
And there's something else you should keep in mind. Having well understood operating principles become more and more important as your business grows, and new people come into the company carrying operating principles from the companies they have left. Operating principles, brought along from past employers, may be in direct conflict with your company's principles. When this happens, trouble looms.

In summary
It is vitally important to regularly carry review of your company’s “key operating principle” and its implications on every aspect of operations. When you find inconsistencies, it is important that the relevant “spin off principles” are adjusted accordingly.

And remember, your employees cannot follow operating principles they don’t know about. Therefore, it’s a good idea to set out your company’s operating principles in written form ─ as they apply to each aspect of the company’s operations. And then, be sure these principles are clearly understood and followed.